Self-Insured Retention: A Complete Guide for Businesses

Self-Insured Retention

If you are a business owner looking for ways to reduce your insurance costs and gain more control over your claims, you may have heard of self-insured retention (SIR). But what exactly is SIR, and how does it work? In this blog post, we will explain everything you need to know about SIR, including its definition, types, factors, advantages, disadvantages, and tips. By the end of this post, you will be able to decide if SIR is right for your business and how to use it effectively.

SIR is a type of liability insurance policy that requires the insured to pay a specified amount of losses before the insurer pays the rest. For example, if you have a SIR of $50,000 and a claim of $100,000, you will pay the first $50,000, and the insurer will pay the remaining $50,000. SIR is different from deductible, which is another way of sharing the risk between the insured and the insurer.

With deductible, the insurer pays the entire claim amount and then deducts the deductible amount from the insured. Deductible also reduces the limit of insurance, while SIR does not. For example, if you have a deductible of $50,000 and a limit of $1 million, your effective limit is $950,000. But if you have a SIR of $50,000 and a limit of $1 million, your limit remains $1 million.

Another difference between SIR and deductible is that with SIR, the insured is responsible for handling the claims within the SIR amount, while with deductible, the insurer handles the claims and then charges the insured. This means that with SIR, the insured has more control over the claims process but also more administrative burden and liability exposure.

To illustrate how SIR works in practice, let’s look at an example. Suppose you own a construction company and have a general liability policy with a SIR of $100,000 and a limit of $2 million. One day, one of your workers accidentally damages a client’s property and causes $150,000 worth of losses.

The client sues you for the damages. You will have to pay the first $100,000 of the losses and the legal fees and handle the claim yourself. The insurer will pay the remaining $50,000 of the losses and the legal fees and provide you with legal assistance. If the losses exceed $2 million, you will have to pay the excess amount yourself.

The main purpose and benefit of SIR are to reduce the cost of insurance premiums. By taking on more risk, you can negotiate lower premiums with the insurer. SIR also allows you to control the claims and avoid small nuisance claims that may increase your premiums. SIR can also improve your cash flow and provide tax benefits, as you can set aside the SIR amount in a reserve fund and deduct it from your taxable income.

Types of SIR

There are two main types of SIR: aggregate and per occurrence. Each type has its own features and benefits and may be suitable for different businesses and risks.

Aggregate SIR

Aggregate SIR is a type of SIR that applies to the total amount of losses in a policy period, regardless of the number of claims. For example, if you have an aggregate SIR of $500,000 and a policy period of one year, you will pay the first $500,000 of all the losses that occur within that year, and the insurer will pay the rest.

Aggregate SIR is usually lower than per-occurrence SIR and may offer lower premiums. Aggregate SIR is suitable for businesses that face frequent but low-severity losses, such as medical malpractice or workers’ compensation. Aggregate SIR can help reduce the number of small claims that may affect the premiums and the claims handling costs.

Per Occurrence SIR

Per occurrence SIR is a type of SIR that applies to each individual claim or event. For example, if you have a per-occurrence SIR of $100,000 and a policy period of one year, you will pay the first $100,000 of each claim or event that occurs within that year, and the insurer will pay the rest.

Per-occurrence SIR is usually higher than aggregate SIR and may offer higher coverage. Per occurrence, SIR is suitable for businesses that face infrequent but high-severity losses, such as product liability or environmental liability. Per occurrence, SIR can help protect the business from catastrophic losses that may exceed the policy limit.

Other Types of SIR

There are other types of SIR that may apply to specific situations or scenarios, such as per claim, per person, or per project. Per-claim SIR is similar to per-occurrence SIR, but it applies to each individual claim, regardless of the number of events.

A per-person SIR is a type of SIR that applies to each person involved in a claim, such as an injured employee or a third-party claimant. Per-project SIR is a type of SIR that applies to each project or contract, such as a construction or engineering project. These types of SIR may vary in terms and conditions and may require special negotiation with the insurer.

Factors to Consider When Choosing SIR

Choosing SIR is not a simple decision. It involves weighing the pros and cons of SIR and assessing the factors that affect the suitability and feasibility of SIR for your business. Here are some of the key factors to consider when choosing SIR:

Size and Nature of the Business

The size and nature of your business can determine the type and amount of risk you face and the amount of resources you have to handle the claims. Generally, larger and more established businesses can benefit more from SIR, as they have more predictable and stable cash flow, more diversified and manageable risk exposure, and more experience and expertise in claims management. Smaller and newer businesses may find SIR too risky and costly, as they have less financial capacity, more volatile and uncertain risk exposure, and less knowledge and skills in claims management.

Level of Risk Exposure

The level of risk exposure refers to the frequency and severity of the losses you may incur from your business operations. The higher the risk exposure, the higher the potential losses, and the higher the SIR you may need to cover them. However, the higher the SIR, the lower the coverage and the higher the liability you may face.

Therefore, you need to balance the risk and reward of SIR and choose a SIR level that matches your risk appetite and tolerance. You can use tools like risk assessment and risk analysis to evaluate your risk exposure and identify the sources and causes of the losses.

Financial Capacity

Financial capacity refers to the ability of your business to pay the SIR amount and the associated costs, such as legal fees, administrative expenses, and reserve funds. The higher the SIR, the higher the upfront costs and the lower the premiums. However, the higher the SIR, the higher the potential losses and the higher the reserve funds you may need to set aside.

Therefore, you need to assess your financial capacity and choose a SIR level that fits your budget and cash flow. You can use tools like financial statements and cash flow projections to measure your financial capacity and plan your SIR payments.

Loss History

The loss history refers to the past record of the losses you have experienced from your business operations. The loss history can indicate the patterns and trends of the losses, such as the frequency, severity, type, and cause of the losses. The loss history can also influence the premiums and the coverage of the insurance policy.

The higher the loss history, the higher the premiums and the lower the coverage. Therefore, you need to review your loss history and choose a SIR level that reflects your loss experience and expectations. You can use tools like loss runs and loss ratios to track and analyze your loss history and identify areas for improvement.

Insurance Market Conditions

The conditions of the insurance market refer to the supply and demand of insurance products and services in the market. The conditions of the insurance market can affect the availability and affordability of an insurance policy. The higher the demand and the lower the supply, the higher the premiums and the lower the coverage.

Therefore, you need to monitor the insurance market conditions and choose a SIR level that adapts to market changes and opportunities. You can use tools like market research and benchmarking to compare and evaluate the insurance market conditions and the competitors’ offerings.

Conclusion

SIR is a type of liability insurance policy that requires the insured to pay a specified amount of losses before the insurer pays the rest. SIR can help businesses reduce their insurance costs and gain more control over their claims, but it also comes with higher upfront costs, increased administrative burden, increased liability exposure, and reduced coverage options.

Choosing and managing SIR effectively requires considering the size and nature of the business, the level of risk exposure, the financial capacity, the loss history, and the insurance market conditions, and following tips such as setting up a reserve fund, establishing a claims handling procedure, hiring a third-party administrator, monitoring and reviewing the claims data, and communicating with the insurer regularly.

We hope this blog post has helped you understand what SIR is, how it works, and when to use it. If you have any questions or comments, please feel free to leave them below. If you are interested in learning more about SIR or other insurance products and services, please contact us today. We are happy to help you find the best insurance solution for your business. 😊